Category Archives: Real returns

Tariffs remain a key unknown

With the only certainty being uncertainty, markets have maintained their composure through the escalation of US trade developments with China.

Generally speaking, risk assets performed well in July with most global equity markets posting solid gains. Significantly, “value”, as a style factor, performed well compared to “growth”, which benefitted our core global equity holding (Schroder QEP Blend Strategy) which has an inherent value bias and which has been hurt for some time by the persistent outperformance of “growth” and “momentum” over “value”. Credit spreads retraced some of their losses with global high yield having a decent month despite relatively narrow spreads and evidence of broader fundamental and technical deterioration. While bond yields moved higher in July, our very modest duration positioning of 0.7 years helped protect the portfolio from this negative drag.

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Geo-political considerations and the impact of China

While the risk of inflation and the overpricing of assets remain concerns, we consider geopolitical risk at the same time. Here we explore one example of how we look at the international political and economic landscape, through an analysis of China’s changing position in the economic world order.

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The end of the cycle is in sight

The pick-up in volatility that began in February continued into March with most major equity markets posting low single digit losses. Australian equities were amongst the worst performers dropping around 4% in local currency terms. All major sectors declined, with the more defensive sectors outperforming. This trend was also reflected in credit markets with credit spreads generally moving wider across the month. Bond yields drifted lower in March, but given the weakness evident in risk assets over the period, the rally was relatively modest. Despite trade war fears and equity weakness the US dollar recovered a touch in March, with the AUD losing ground. GBP also gained ground amid UK Brexit negotiations.

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Trump tariffs and Brexit bring geopolitics into focus

February offered investors a glimpse of what could happen if economic conditions and policy shift slightly on their respective axes. While our returns were not spectacular in February, they were positive against a backdrop of some large falls in equities (while global equities declined around 3.5% during the month, intra-month declines in some markets were in the order of -10%) and wider credit spreads, mainly in the high-yield space. This served as a timely reminder that risk does matter, and certainly from our perspective in managing the strategy, avoiding/mitigating drawdowns is an extremely important objective. While we acknowledge that our returns would have been better in 2017 if we’d held more equities, this is a double-edged sword. More equities are fine on the way up, but punitive on the way down, and, while we’d like to think we can time markets, the reality is we can’t. February showed what can happen.

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Blow-out, or blow-up: Why risk still matters

Despite a frenetic start to 2018, much of the trajectory of markets is as expected and forecasts are unchanged for the medium term. However, with indicators that core inflation is rising — particularly in the key US market — it remains to be seen how policymakers will deal with this issue, and also how it will affect investor perceptions about the prices they pay for assets.

Separately, the sovereign bond markets have had a shaky start to 2018 and while we’ll hold back on saying there’s a start of a bear market on bonds, there are two ways it could go — to blow out, or blow up. A blow out would come as gains accrue in the absence of a market shock, like inflation. A blow up could occur with anything that challenges the fundamental macro and policy support for the market, including a growth shock from China, a pick up in wages or inflation, or central banks being slow to respond to inflation.

The near euphoric sentiment evident in January was a good precursor to February’s re-pricing. The bigger risks though are fundamental, and rising inflation is a legitimate cause for caution.

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